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Abstract
The aim of this paper is to explain the importance and implications of
the use of Efficient Market Hypothesis (EMH) in emerging market with a view
to see how portfolio assets are priced and the rationale behind it. The EMH
describes a rational market where all relevant available information is
reflected very quickly on prices. In an efficient market prices should react only
to new unanticipated information, and since this is unpredictable, by
definition, price changes must be unpredictable also. The EMH describes the
case of an ideal stock market where actual prices fully reflect all relevant
information. Consequently, the price and corresponding return fluctuations are
not predictable and it's impossible for investors to make gains systematically.
For many years, the EMH seemed to describe adequately the price behaviour
in the world stock markets. Nevertheless, recent finding indicates otherwise.
The research design of the paper is qualitative and content analysis is going to
be use. The paper concludes that despite its shortcoming the EMH remains an
open issue and it has help in deepening stock markets worldwide because of it
acceptability. Therefore the paper recommends that more researchers should
be encouraged to be conducted in emerging market of Africa especially that
of Nigeria.
Introduction
The efficient market hypothesis (EMH) is one of the widely discussed
area and for that reason has received a lot of attention in the field of finance.
Arguably, no other theory in economics or finance generates more passionate
discussion between its challengers and proponents than EMH. For example,
as noted by Harvard financial economist Michael Jensen, there is no other
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literature review
The literature review will dwell on the composition of efficient market
hypothesis and other related theory on stock market as well as some related
empirical studies conducted on EMH for both developed and emerging market
of the world.
Weak-Form EMH:
Weak-form of efficient market hypotheses assumes that the current
stock prices fully reflect all historical market information such as: (historical
sequence of prices, trading volumes, and any market generated information).
Weak EMH suggests that todays stock prices reflect all the data of past prices
and that no form of technical analysis can be effectively utilized to aid
investors in making trading decisions. Advocates for the weak form efficiency
theory allow that if fundamental analysis is used, undervalued and overvalued
stocks can be determined, and investors can research companies' financial
statements to increase their chances of making higher-than-market-average
profits.
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Strong EMH:
The strong-form efficient market hypotheses assume that stock prices
reflects all information from both public and private sources, so that no one
investor can reap abnormal rate of return. The strong form version of the
efficient market hypothesis states that all information both the information
available to the public and any information not publicly known is completely
accounted for in current stock prices, and there is no type of information that
can give an investor an advantage on the market. Advocates for this degree of
the theory suggest that investors cannot make returns on investments that
exceed normal market returns, regardless of information retrieved or research
conducted.
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the empirical results given by the tests fail to reject the null hypothesis for the
daily returns of UNIONB and NESTLE and weekly returns for FIRSTB and
NESTLE. The author concludes that the Nigerian stock market is inefficient
in the weak form.
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References:
Abeysekera,P., S. Efficient Markets Hypothesis and the Emerging Capital
market in Sri Lanka: Evidence from the Colombo Stock Echange A
Note, Journal of Business Finance and Accounting 28 (1):249-261.2001
Abraham F., j. Testing the Random Walk Behaviour and Efficiency of the
Gulf stock markets. The Financial Review 37:469-480. 2002
Alam, M. I, and Tanweer, H, and P-R. Kadapakkam, An Application of
Variance-Ratio Test to Five Asian Stock Markets. Review of Pacific Basin
Financial Market and Policie 2 (3):301-315. 1999.
Alexakis,C. An empirical investigation of the efficient market hypothesis:
The Case study of the Athens stock exchange. A PhD dissertation at the
department of Economics and related studies, University of York Herligton,
England. 1992.
Paul,B. Thin Trading and Stock Market Efficiency: the Case of the Kuala
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